|An ounce of bounce: Nifty seems poised to test 5,300 again|
|Written by George Albert|
Written for First Post
The investors have been whipsawed in the past few days. As the yields of Spanish bonds rose dramatically the NIFTY and other equity markets sold off. But readers of this column would have sold the NIFTY much earlier when the index touched resistance levels. We had shown these resistance levels in our earlier columns. Please see the Nifty Chart for the resistance zones. Resistance levels are zones where the supply of an asset exceeds demand leading to a fall in price.
Then the head of the European Central Bank stepped in and said it would do anything to save the Euro including buying Spanish Bonds. This boosted the markets. The markets were also expecting the US Federal Reserve to ease monetary policy. The sugar rush led to strong rallies in the equity market. Then came the underwhelming reality when the Federal Reserve and the ECB did nothing but offer more talk. The result was a sell off.
Next came the better than expected jobs number in the US on Friday which resulted in the over 200 point rally in the Dow Jones index. The jobs number though better than expected did not help the unemployment rate which crept up to 8.3% from 8.2% showing continued weakness in the US economy. The markets however rallied. The Friday rally in the US markets is expected to give a positive boost to the NIFTY and Sensex on Monday.
The NIFTY has been rallying after hitting a not so strong support level marked by the blue lines on the chart between 5020 and 5050. Support levels are zones where the demand for an asset exceeds supply leading to a rally in price. Given the strong rally from that level the index can go all the way up to the 5300 level. It however has to clear the 5267 level before it reaches the 5300 area. The 5260 level is important as it's an area where a price gap begins. A price gap happens when the market closes at a certain level and then opens at a different level given an extraordinary demand-supply imbalance.
In the case of NIFTY, the index closed around the 5306 level on July 11 and then fell the next trading day to open at 5240. Then on July 13 the index went up 5267 and then dropped over the next few days to the 5050 area. So now the gap is between 5267 and 5306 and if price rises above 5267 it could go all the way up to 5306.
Gold breakout fails
A look at the Gold Chart shows that gold broke out of the symmetrical triangle last week and was poised to rally. However, the precious metal fell back into its triangle. With this price action the symmetrical triangle is no longer valid. However, the lower up sloping line of the triangle could be used as support. If prices touch the line one could go long on the precious metal.
The sell off in the dollar index has given the rupee a breather. The Indian currency will be range bound between 54 and 57.50 for while unless something dramatic happens. An easing by the Federal Reserve expected in September will be a positive for the Indian rupee. The rupee also has a smaller range between 55 and 56.50 that it could move in. Traders could buy or cover short positions at the bottom of the range and sell or short at the top of the range. Keep an eye on the 81.75 level on the dollar index, which is a strong support area that could lead to a bounce in the greenback. The index closed at 82.38 on Friday.